What is the difference between asset securitization and assetbacked securities?

What is the difference between asset securitization and asset-backed securities Introduction: The World of Financial Instruments Hello and welcome to our video on asset securitization and asset-backed securities. In the complex realm of finance, various instruments exist to facilitate investment and manage risk. Two such instruments, asset securitization and asset-backed securities, often cause confusion due to their similar nature. Today, we'll explore their distinctions and how they contribute to the financial landscape. Defining Asset Securitization Asset securitization refers to the process of converting illiquid assets, such as mortgages or loans, into marketable securities. The objective is to transform these assets into tradable instruments, thereby enhancing their liquidity. This process involves pooling together a group of similar assets and issuing securities, typically in the form of bonds, backed by the cash flows generated by these assets. The cash flows act as collateral for the securities, providing investors with a level of security. The Role of Special Purpose Vehicles (SPVs) To facilitate asset securitization, a Special Purpose Vehicle, or SPV, is often established. This legal entity is created solely for the purpose of holding and managing the securitized assets. By isolating the assets within an SPV, the risk associated with the originating institution is minimized. Additionally, the SPV can be structured in a way that provides bankruptcy remoteness, ensuring that the assets are protected even if the originating institution faces financial distress.